Watchdog to rule interest-only loans were NOT mis-sold as officials face up to problem of borrowers unable to repay their mortgage

Unable to repay: But the FSA could rule that there has not been widespread mis-selling of interest-only mortgages

Officials are expected to rule that there has not been widespread mis-selling of interest-only mortgages, according to reports this morning.

The Financial Services Authority (FSA) is examining interest-only mortgages as the time approaches when large numbers of the loans sold during the credit boom become due for repayment.

The FSA is due to report back in the first quarter of this year.

According to the Times, the watchdog is looking at the need for action to deal with the problem of borrowers who reach the end of their mortgage term with no way of repaying the full loan amount.

Property data provider Xit2 has
estimated that as much as £116billion will be owed to lenders over the
next eight years by borrowers that have no means to repay their
mortgage, creating a huge surge in repossessions.

The issue is expected to span from 2017 to 2030 as loans become due. Xit2 believes 1.28million interest-only loans have been granted since 2002 that have no repayment plan in place.

The FSA said today that it is working to find out firm figures on the numbers affected by shortfalls on interest-only mortgages, but that no formal decision on whether products were systematically mis-sold would be made.

The impending crisis has raised fears that borrowers will seek redress
from advisers and lenders on the basis that the risk was not fully
explained to them.

However, the Times today reported sources who said the regulator would
rule that mis-selling was not systematic, as was the case with payment
protection insurance (PPI).

Interest-only mortgages require borrowers pay just the interest due, and do not repay the sum borrowed in full.

The idea was that the lower cost would allow borrowers to set money aside in a savings or investment vehicle that could then help clear the outstanding balance when the loan became due.

At risk: Homes bought before the credit crunch are likely to have seen significant rises in value and therefore leaving borrowers with large amounts of equity

In reality, many borrowers were persuaded to borrow on an interest-only
basis but did not set this money aside. Instead they relied on rapid
gains in house prices to provide them with equity that they could
extract when the house was sold.

Lower
house price rises since the credit crunch, with falls recorded in many
areas, have reduced equity gains and many now face reaching the end of
the their loan period unable to repay their mortgages and leave enough
equity to buy a new home.

Those most vulnerable to a squeeze on interest-only loans are those who borrowed in the years immediately before the credit crunch. Homes bought before this are likely to have seen significant rises in value and therefore leaving borrowers with large amounts of equity.

INTEREST-ONLY TIMEBOMB CALCULATOR: HOW TO DEFUSE YOURS

The good news for those stuck in the interest-only trap is that for many there is still time to do something, writes Simon Lambert.

That is why This is Money has built
our interest-only mortgage timebomb calculator. Its aim is to serve as a
wake-up call to those not repaying their mortgages and with no plan of
how they will do so.

We have been warning borrowers about this for many years, as these articles from 2006 and 2009 highlight.

Simply hoping house prices rise is
not enough, after all you will still need somewhere to live and if you
sell your home to clear a mortgage you will either have to move to a
much smaller property or become a renter – probably at the same time as
your income drops in retirement.

Borrowers in this position should
either get a solid investment or savings plan and stick to it, or move
to a repayment mortgage.

Moving to an offset mortgage and starting saving into it rigidly can also work.

If you cannot afford the one-off hit
of moving to a repayment mortgage, moving to one part of your loan at
least starts clearing your debt.